perspective

As if a hundred short sellers screamed in agony* and suddenly fell silent

-“funding secured”

(*actually not, rather they celebrated, knowing the endgame had finally arrived; since knowing the facts rather than a wishful narrative, they understood the action was the last desperate act of a fraudster at the end of his rope)

Topic: why all the negativity?

Discussion: investors are on balance long biased and thus need an opposing view for balance

Conclusion: more pessimism (almost) always leads to a more balanced view

You know the 150 people you actually know? They aren’t the same as they were 10 years ago. If you’re serious in your quest for a fresh perspective on things, write an e-mail and ask for your advice from your old network (I got the idea from the book about networking effectively, that Anna Svahn is writing as we speak).

Tip: start by expressing some appreciation and if possible provide something of value. Givers are more successful than matchers and takers. And appreciative people are happier.

The curious case of the lone genius giga fraudster

Let’s forget for a while that Tesla is burning a billion dollars every three months (e.g., cash flow was -1.3 to -1.4bn in Q2), and that it’s effectively running out of money by the turn of the year, unless it manages to raise new capital by then. Nota Bene, this isn’t controversial; it’s a financial fact.

Tesla has over 10 billion dollars in debt. Tesla holds a billion dollars in client deposits. Tesla has a negative net working capital of 3 billion dollars, giver or take. Tesla has 1 billion in convertible debt maturity effectively coming up by the turn of the year. Tesla has at least half a billion of its cash reserves where it can’t be accessed. Anyway, let’s forget about money running out in just a few months, since that’s not really an issue of cash flow turns positive.

Let’s forget that even though sales have increased at an impressive rate, so have losses and executive compensation. These are indisputable financial facts. If anything, the numbers are artificially positive due to creative accounting, not least by under reserving for service costs.

Let’s also forget about the quality issues with hastily manufactured tent “lemons”. Let’s also forget about Tesla’s failed attempt at disrupting the “stealership” model, consequently leaving clients to deal with maintenance, repair and spare parts themselves.

Let’s also forget about the hundreds of former Tesla fans, witnessing about poor to non-existent service, about cars being paid for but not delivered, about deposits not being returned on demand, about suppliers not getting paid or are asked to pay money back (!)

Before: several years of a monopoly-like situation + subsidies = increasingly unprofitable

At this point let’s just think about one single thing, since profits and cash flows are what ultimately decide the fate of a company:

Some of the bullish analysts and bag holders of Tesla stock are counting on Tesla and Musk finally turning profitable now that its subsidies are ending and a tsunami of competition (with subsidies) is entering their market.

Wait, what? Wut? Hqr sez wut?

Yup, that’s right, that’s what’s coming now according to bulls. Elon Musk has never turned a profit in any of his companies. The last fifteen years, Tesla has only increasing losses to show for its efforts to exploit its supposed first mover advantage and massive subsidies. But, now, finally, with a deluge of formidable competitors, with as deep pockets as experience in building and testing cars, Tesla is supposed to somehow reap the benefits of… scale, competitive position, increased margins?

Not only that, just as the available market is about to fall by 90% in the coming years, Tesla’s subsidies are going away. Tell me again how that is supposed to finally push margins into positive territory.

The bigger the lie, the easier to get away with it, and Tesla is about as big as they get, just like Theranos, Enron and Madoff before that. Or Nick Leeson and Jérôme Kerviel.

Many fraudsters start out with good intentions, probably Elon Musk too. However, as reality catches up with dreams, losses and mistakes have to be swept under the rug. “It’s just temporarily“, they think, “for the greater good in the long term“, they reason, and go on to make bigger and bolder bets to cover up their little mishaps.

An idea about luxury roadsters and other premium cars making profits, that finance investments in mass-market car manufacturing that’s supposed to make even greater profits, instead turn into ever increasing losses and thus the necessity for side-shows of acquisitions and unrealistic innovations.

At some point the well-intentioned and benevolent disruptor realizes his predicament and steps over the fraud line. The genius has now become a fraudster; and with increasing vitriol and intensity he attacks everyone who expresses the least bit of skepticism, while coming up with ever more fantastic claims about breakthroughs that are on an “order of magnitude” above and beyond anything previously seen. At this point the smart money knows the game is up and starts pointing it out, but it takes years (Enron, CDOs, Allied Capital), sometimes decades (Madoff), for the Ponzi scheme to collapse into the surprised and devastated hands of the bag holders.

This is not about Tesla, but about balance and perspective

Why all the negativity? Because almost everybody else has a positive bias. It takes effort and guts to find and relay negative information to a herd of stampeding bulls. Very few bother, since everybody seems to hold nothing but contempt for short sellers, including SEC officials (who famously like to interrogate whistle-blowers and short sellers rather than investigate the actual perpetrators).

It’s simply humans being humans when bullish investors turn a blind eye to all the obvious negative facts, and instead pat each others’ backs, repeating their faith based narrative, “obviously corroborated by the stock price (bro)”. It’s not really their fault. The problem actually lies with bears being too silent, passively allowing gullible bulls to be had for a ride. Humans are gullible by nature; we like a good story and we tend to positivity. We want to believe in stories bout heroes. We want to believe in seeing ourselves becoming rich, in particular if it’s by supporting a good cause at the same time. Fraudsters (whether by design or mistake) take advantage if that trait.

That’s why bears armed with facts are so important. They perform an almost invaluable service in their quest of fact finding and creating balance in the otherwise one-sided bullish narrative. Humans are lazy and blind to other stories than their own. Nothing wrong with that, it’s just our nature. But that’s exactly why the bears are needed: to create perspective, to catalyze questioning and to provide facts and arguments that can be directly measured against whatever the bull story is.

It’s currently the most important story there is

But why Tesla all the time? You keep ranting about Tesla; why the negativity?

It’s because it’s the biggest and simultaneously most obvious house of cards out there. It’s the most unbalanced narrative there is in public markets right now, in terms of the bull story being the least factful and the bear story being the most tangible. There’s almost a hundred billion dollars at stake, not to mention bag holders car owners that have or have not received their cars but stand to lose any kind of warranty, pre-payments or access to spare parts or super-chargers.

Quite often, bear stories are more qualitative than financial in nature, i.e., less numbers based and more speculative regarding troubles ahead. Not too rarely, very high valuations feature in bears’ short stories, although most smart bears know that’s nowhere near what’s needed for a successful short.

Not this time though. This time the bulls are the dreamers, and the bears don’t even need to start talking about the valuation, since Tesla’s money is actually running out (and with no plan for raising new).

No matter how much bloggers, podcasters and successful investors try to dig out the true foundations of the bull story in Tesla, they come up empty handed. It’s all narrative and hope that the lone genius, who so far has accomplished nothing, will soon magically wave his cave dildo, display his magic beans, and create actual profits.

Occam’s razor would long ago just have labelled Musk a fraudster rather than a genius, and all his actions would be all that much easier to explain.

A genius wouldn’t manufacture lemons and losses. A fraudster could. A genius wouldn’t fantasize about products he could never afford to build. A fraudster might as a cover-up. A genius wouldn’t put himself at the mercy of markets (no cash, negative flow). A fraudster would claim funding is secured (even if the claim might prove to be securities fraud). Would an environmentalist genius have five large Bel Air mansions and the biggest private jet there is (G650)? He could, but a fraudster fits the bill better. A genius maybe should have produced profits some time in his history. A fraudster wouldn’t see why. Finally, a genius wouldn’t pump up numbers in collaboration with his brother in an unrelated company and push his board into accepting a takeover at the very peak of that company’s business. A fraudster? Hell yeah!

This last bit is admittedly speculative, but the perspective is still important. No matter, the bull-genius narrative has only dreams, hopes and fantasies in its corner; while the bear-fraudster story is based on facts about sales, costs, profits, production numbers, quality reports, traffic statistics and not least a much more likely and coherent overall picture.

Market perspective

By the way, how’s this for perspective: imagine a private investor, an amateur with less than a decade under his market belt, doing all his research after his ordinary job hours, without any real insight in the inner workings of either the financial industry or that of the stocks he invest in. Imagine that same person thinking he understands more than, oh I don’t know, e.g., Mark Spiegel, David Einhorn, Jim Chanos…, and me.

I know, I know, I know… why would decades of profitably navigating several bull and bear markets, including investing on both the long and short side in hundreds if not thousands of individual companies, no less with the help of a solid financial education, actually having investing as full-time profession, supported by many, many competent co-workers and with access to dozens of the top financial research firms, ever stand a chance against a lone amateur? Or, er, wait a minute…

That’s not how herds operate

Maybe, just maybe, the unquestioning bulls need to be shaken out of their confirmation bias bubble and start listening to the fact-finding minority. Sure, we are guilty of CB too, but I’m sure all experienced bears make a true effort of mapping out the bull case in as much detail as humanly possible. The bulls? I’m not so sure, that’s not how herds typically behave.

How about you? Are you long or short Tesla, and have you queried the other side for their best arguments and pitched your own against them yet?

Drink enough wine, drink enough tea, kiss enough frogs. With time, experiences arrange themselves along a scale, the finer ones appearing even finer than the first time, the bottom tier going from “thinkable” to “unthinkable”.

Having access to the entire scale of something adds a whole new dimension to your knowledge.

Investment-wise, having seen enough economic and financial cycles, and being able to pin point your current place, you’ll be in a qualitatively different position to assess the relevance, risk and value of a single piece of information.

Length: 10 minutes

Topic: deep time, the cycles and pendulums of history, the importance of perspective to gauge your actual state, and guide your long-term action and investments

The catch: You need perspective to appreciate perspective.

Bonus: if you’re Swedish, listen to episodes 102 and 103 of my podcast “25 minuter” that both deal with the book The Fourth Turning, its implications and how you can prepare

Breaking news: the US has left the gold standard

-that’s why there is an epic bull market in 2017

On August 15, 1971, president Nixon decided it was about time the U.S. abandoned the gold standard. That was a dick move. Unfortunately I didn’t recognize that, even when I got it stamped on my forehead in school.

I started business school in August 1990, almost to the date 19 years after Nixon’s most criminal act. Those 19 years dealt me a severe blow, since when I studied the breaking up of the gold standard in college, I erreneously thought of 1971 as ancient history.

In other words, in 1990 more than my entire life separated me from the fall of 1971. That myopia made me disregard gold matters as irrelevant. Now, with more perspective, it’s almost as if 1971 and 1990 took place more or less at the same time. Another interesting observation is that the ink of the Bretton Woods agreement had barely dried when it was nullified just 13 years after its full implementation in 1958.

When I was younger I tended to think of historical things, of laws, of institutions as eternal, and historical people as different from modern people. Eventually I realized they were just like us, and their decisions and institutions just as ad hoc, flimsy, desperate and ephemeral as the retarded measures we now in real time witness the central bankers take today.

The below picture shows the life span of a long-lived person born around the time of The Great War, aka World War I. The second line is my own life span (if I only live to a hundred, rather than forever). The minuscule time, admittedly not quite to scale, between the gold coup and my starting business school is marked with a ‘micro’ sign. Notice how close to today even the World Wars seem, when compared to a life or two.

The question marks mean that nobody actively remembers the history or future outside a long life span.

Ahhh, the golden 1990’s — how modern they were

I think I instinctively considered the gold standard a barbarous relic, relying on an expensive metal and a post-war agreement (Bretton Woods) — one thing more ancient than the other

In my view, the whole business of “gold standard, no gold standard” had taken place in a whole different era than the 1980’s in which I had spent the entirety of my young adult years — or, for that matter, the truly modern and promising 1990s that had finally kicked off the countdown to the new millennium.

yours truly, 1993 1991

Book tip: Ready Player One, if you want to relive the 80’s and don’t mind some teen science fiction action.

News flash: the USD has dropped by 97% since Nixon’s coup

Today it’s been 27 years since I started studying finance and first learned about the breaking of the dollar-gold bond at 35 USD per ounce. Since then the dollar has lost 97% of its value, as gold is now changing hands at some 1300 USD per ounce.

I no longer think of my college years as that far away, and I actually feel the early 1970’s are pretty close too. They’re not history anymore, but rather part of my own first hand economics life experience.

My perspective took time, yours doesn’t have to

I’ve gained quite a bit of perspective managing a hedge fund through the roller coaster years of 2000-2015, not to mention being an IT and internet analyst during the dotcom bubble of 1994-2000. As an added extra I got to experience first hand how the Swedish central bank raised its policy rate from 25% to 75% and finally 500% in September 1992, in a futile attempt to defend the Swedish Krona. I’m sure they felt just as invincible and smart as the Bernankes, Kurodas, Draghis and Yellens of today.

If I only had had that perspective in 1990, I would have paid more attention. I would have understood the relevance of both the beginnings and the end of the Bretton Woods agreement. I had the opportunity to learn crucial lessons about money, but botched it due to a lack of perspective. Because of that, most of my time as an investment professional I had a muddled view of the credit cycle, of interest rates, of the mechanics and incentives of central bankers, of how money is made, how it sloshes around in search of a resting place it can never find*, how money, debt and interest rates control everything in nominal terms, but nothing in real terms (except temporarily).

Experience and perspective is the hidden assumption behind my 12 pillars of investment wisdom (the TAOS framework). You just can’t be expected to master or understand them unless you have enough perspective.

* A perspective on cash: all money is always money, until it is officially retired. All cash created always exists forever on the sidelines, since any cash purchase immediately lands the cash in the pocket or bank account of the seller. The same goes for securities, where all stocks are always held by somebody, and can thus in aggregate never be held in excess or vice versa. Money can chase stocks in a never ceasing whirlwind of higher prices, or stocks can chase cash in a death spiral of a price crash. All the stocks and all the cash nevertheless are all always there, never on the sidelines, never more buyers than sellers, just more or less eager ones.

Here’s the catch-22 with perspective: You don’t appreciate its value if you don’t have it…, so why would you bother getting it in the first place?

Once you catch on to the concept and its usefulness you just can’t get enough of it, but how do you make that first spark fly without wasting decades on actual experience? Unfortunately, I don’t have a definitive answer on how to ignite an appetite for perspective. However, getting it is a little more straight forward.

Read

Read economic history. Read biographies. Talk to older people. Hang out with groups outside your typical sand box of clones. Visit other countries, and study long term charts of macroeconomic data. “Long term” means many decades, if not hundreds of years, not just 5-10 years. See if you can pick out any useful recurring patterns, cyclicality if you will, in growth, productivity, inflation, interest rates, gini coefficients and the price of gold, oil and other commodities.

Specifically I would like to recommend the following books:

4th Turning

Signals

Lords Of Finance

Tomorrow’s Gold

Bull!

The Great Crash

Reminiscences Of A Stock Operator

The Fourth Turning and other views of history as a cycle or pendulum

The Fourth Turning by Strauss and Howe tells a story of “cyclical time” rather than linear time. It tells a story of recurring patterns of calm, prosperity, turmoil, crises and rebirth. It tells a story of how generations shape society and society shapes generations.

The main tenet of the theory is that big events, like the second world war, e.g., affect young people in a certain way, adults in another, middle-aged people in a third and older leaders in a fourth and final way. The young people grow up as a certain generational archetype due to their common experiences during the crisis. They then shape society as well as the next generation in a certain way, thus creating the second generational archetype. This process continues for a third and a fourth archetype.

When the four archetypes are thus arranged in a certain way, and the former crisis has been forgotten, the society is predisposed for decisive action when triggered by a major event. One thing leads to another in that environment and a new crisis takes hold, breaking down old dysfunctional institutions to make way for new.

Just as there are four generational archetypes, there are four societal moods,or “turnings”. When gen1 are children, gen2 are adults, gen3 middle-aged and gen4 are elders, history is ripe for a fourth turning, a period of crisis. Each generation spans some 20-25 years, as do each turning. Once the generations move one step out of the crisis constellation, the fourth turning’s climactic end yields to first the first turning, then the second and finally the third. Then it starts all over again.

I don’t expect society as a whole to learn, but a few select individuals can take advantage of the rhythmical variations.

There are many other, more or less similar, depictions of recurring patterns in deep time, a pattern that is often overlooked due to taking place at time scales just outside the normal attention of a long lived single human. What history forgets, history repeats.

If you make sure to remember the patterns of history, something completely different than memorizing dates, presidents, kings and wars in school, you could gain an enormous advantage, not least as a long term investor.

Flatland

There is a movie called “Flatland”. No, don’t see it, it’s awful! It does convey an important lesson on perspective though:

Flatland takes place in a two-dimensional world. The main character has a dream about visiting 1D-land and how he finds their lack of perspective unfathomable. He in his turn is visited by a sphere from 3D-land, a divine entity that can move perpendicularly to his entire 2D world, magically appearing and disappearing, as well as moving from room to room without opening any doors. 2D guy has a very hard time wrapping his head around the concept of a 3D perspective but once he sees it he’s mesmerized.

Now, imagine being visited by a 4-dimensional creature that can appear and disappear in space, that can move from room to room with closed doors by entering into a fourth dimension outside our three, repositioning itself and entering another room seemingly from nowhere.

That’s the kind of perspective knowing your deep history can give you. That’s the kind of powers being able to pinpoint where we are in cyclical time can get you.

Summary – you may not know it but you need and want perspective

Did you know nation states are a quite recent innovation? Are you aware that state pension systems are designed in a way that a snow ball in hell stands a better chance at survival than they do — in particular with low interest rates? Equities are significantly more expensive today than at any other point in history, despite lower growth potential – why do you think that is? The Fourth Turning probably started in 2008. Typically, institutions such as the UN, the EU, the USD and many more would crumble as we get closer to the 4T climax around 2025-2030.

Do you think you know enough about how to handle a future of automation, job death, no pensions, a failed dollar, more authoritarian government etc? Do you have sustainable plans for your career and for your investments?

If not, it’s high time you gained some perspective of deep time, the changes that may or may not come, and what skill sets and preparations could lend you the upper hand.

Good luck!

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